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Professor Valery Polkovnichenko Practice questions for Midterm 1 Answers Finance 4346 Investment Management Professor Valery Polkovnichenko
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1. Company A announced a merger with company B on February 13, 2006. In the all-stock deal each share in company

Behavioral Finance and Technical Analysis
12.1 The Behavioral Critique
The premise of behavioral finance is that conventional financial theory ignores how real people
make decisions and that people make a difference. The anomalies described in last chapte

The Efficient Market Hypothesis
11.1 Random Walks and the Efficient Market Hypothesis
The study of M. Kendall on the stock market returned that stock prices do not follow a predictive
pattern. This makes sense because a forecast about favorable future per

Arbitrage Pricing Theory and Multifactor Models of Risk and Return
(APT is a combination of factor model with no-arbitrage condition)
10.1Multifactor models: an Overview
In the index model, the return on the market portfolio summarized the broad impact of

The Capital Asset Pricing Model
9.1 The Capital Asset Pricing Model
The CAPM is a set of predictions concerning equilibrium expected returns on risky assets. The
assumptions underlying CAPM are:
1. There are many investors, each with endowment that is sma

Index Models
8.1 A Single Factor Security Model
The success of a portfolio selection rule depends on the quality of the input list, that is, the
estimates of expected security returns and the covariance matrix. In the long run, efficient
portfolios will b

Optimal Risky Portfolios
7.1 Diversification and Portfolio Risk
The risk that remains even after extensive diversification is called market risk, risk that is
attributable to market-wide risk sources. Such risk is also called systematic risk, or nondivers

Risk Aversion and Capital Allocation to Risky Assets
2.1 Risk and Risk Aversion
A risky investment with a risk premium of zero, sometimes called a fair game, amounts to a
gamble. A risk-averse investor will reject it. Risk-averse investors are willing to

How Securities Are Traded
3.1 How Firms Issue Securities
The new issues of stock, bonds etc. are marketed by investment bankers in the primary market.
Trading of already issued securities among investors occurs in market the secondary market.
There are tw

Asset Classes and Financial Instruments
2.1. Money Markets Instruments
Treasury bills are most marketable of all money market instruments. T-Bills are sold by the
government to the public at a discount. The interest earned by the investor is the differenc

The Term Structure of Interest Rates
15.1 The Yield Curve
Bonds of different maturities typically sell at different yields to maturity. Practitioners commonly
summarize the relationship between yield and maturity graphically in a yield curve, which is a
p